Markets ignore geopolitics

Last week’s news was dominated by geopolitical tensions surrounding Ukraine and Greece. An accord was reached in the first matter, and talks on the second will continue this week. Although both events have potentially significant consequences, the negative response from the international financial markets was minimal.

Important factors in the news will be the outcome of the negotiations with Greece and the initial developments with the cease-fire in eastern Ukraine.Ben Steinebach Head of Investment Strategy

It remains to be seen whether the combatants will actually abide by the cease-fire agreement (taking effect on Sunday, 15 February): the experiences with the previous agreement, in September last year, offer little in the way of encouragement. Additionally, the presidents (Putin and Poroshenko) appear to have little control over the fighting elements, i.e. the separatists and the Ukrainian militias, respectively. Nevertheless, it is of course good to see Russia and the West talking once more.

Both sides in the Greek situation are understandably using hard language to bolster their own positions. However, it is also important to realise that it is in the interests of both sides to reach an agreement, and that sufficient possibilities exist to negotiate a compromise. One example of a possible compromise might be to further extend the repayment period of Greece’s vast government debt a little. The Greeks themselves appear willing to take significant steps to fight corruption and introduce other reforms. In this respect, Syriza (and Tsipras and Varoufakis, the party’s representatives) seems to be a constructive partner in the talks. The threat of liquidity issues in the Greek banking sector, which – owing to the lack of collateral – is currently unable to rely on the European Central Bank, has been averted for the present. The ECB has raised the ceiling of an emergency liquidity assistance (ELA) facility by EUR 5 billion, giving Greece’s banks access to sufficient funds and rendering the possibility of a bank run unlikely.

Last week’s macroeconomic news was mixed. In the United States, confidence among in particular the smaller companies – which still make up the backbone of the economy – fell slightly in January, while over the same month retail sales continued their decline. However, during Q4 of last year economic growth recovered strongly in both Germany (+0.7%) and the Netherlands (+0.5%). The sentiment on the stock markets last week remained excellent, with increases ranging between 0.5% and 1.5% relative to the Friday before. The bond markets in the most important countries, conversely, showed little movement: only in the south of Europe did interest rates climb very slightly as a consequence of the problems surrounding the negotiations with Greece.

Respectable earnings reported by several important Dutch companies

Developments on the Amsterdam exchange last week were largely determined by the publication of the earnings of some leading companies. Remarkably, ING is now once more distributing dividends, having repaid its debt to the Dutch government. ING’s net profit for Q4 – EUR 530 million – was down 20% relative to the year before, owing primarily to disappointing Dutch operations. Nevertheless, its renewed dividend distribution – the first since the financial crisis began – was sufficient reason for investors to reward the stock with higher listings on three consecutive days. In fact Dutch companies in general increased their dividend distributions in 2014: the total value paid out by the sixteen companies on the AEX that distributed dividends last year was 12% more than in 2013.

Other companies that drew the Amsterdam exchange’s interest last week were Heineken, AKZO Nobel, DSM and TomTom. Heineken announced good results, an important contributing factor being the 2014 football world cup. DSM’s Q4 profits fell slightly short of expectations, though the company announced a very positive outlook for 2015, largely linked to the depreciation of the euro against the US dollar. AKZO Nobel’s earnings of EUR 330 million were more or less as expected, as was the outlook that the company announced for 2015. Midcap stock TomTom lastly predicts that its sales will resume their growth in 2015. Although the profits were only marginally higher than expected, the company’s stock was rewarded with an impressive surge of 18%. The AEX reached 460.43 points last week, a new high for the year and a 1.3% climb relative to the Friday before; the index in fact recorded 464 points on 13 February.

Geopolitical news set to be the most important driver

Little macroeconomic news is expected this week. However, more corporate earnings are yet to be published (particularly by Dutch companies). Important factors in the news will be the outcome of the negotiations with Greece and the initial developments with the cease-fire in eastern Ukraine. The most exciting macroeconomic news will be the latest figures on construction output in the European Union and Italy for December. The ZEW Index will also be published, providing information about how investors view the economic situation in Germany (and in Europe as a whole). The United States will release data about industrial output and production prices, while the Philadelphia Fed Index will also be published. Lastly, data about consumer confidence in the European Union will be announced.

On the corporate side, we look forward to the earnings of TNT-Express, Wolters Kluwer, Randstad, Air France KLM and BAM in the Netherlands. The international earnings season will gradually come to an end, though announcements are expected from Walmart, Nestlé and Schneider Electric. However, most eyes will unquestionably be on the negotiations between the European finance ministers about the Greek debt problem. The US markets will be closed on Monday, 16 February, for George Washington’s birthday.

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Ben Steinebach

Head of Investment Strategy

Ben Steinebach graduated with a degree in General Economics, specialising in macroeconomics, international economic affairs and public finance. He held various positions in the financial industry before joining MeesPierson in 1999. Ben has been Head of Investment Strategy at ABN AMRO since 2010.